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From: Jared Hamilton
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Mike Gorun

Mike Gorun Managing Partner/CEO

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Rewarding the Four Percent: Delta’s New Loyalty Strategy

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Delta Airlines recently revamped its loyalty program changing how rewards are distributed to its customers.  In an article in Knowledge@Wharton, Peter Fader, Wharton Marketing Professor, applied the concept of customer centricity in reviewing Delta’s current loyalty program.

The concept is simply; “the recognition of differences across your customers.” Knowing that 4 percent of Delta’s customers accounted for 25 percent of their business, Fader found that a redistribution of rewards would truly allow Delta to better acknowledge their most valued customers. This led Delta to rethink their loyalty strategy so that it could be tailored more towards rewarding the customers that bring in the most revenue, rather than treating all loyalty members equally.

It’s actually quite innovative. It’s certainly easy to understand when illustrated by this example: A businessman who takes frequent short trips, on little notice and pays full fare, is rewarded less than the couple that travels infrequently, over long distances, books well in advance and at discounted rates. The article points out that, in the current state of many frequent flyer programs, it would be more difficult for the businessman to earn rewards and perks than it would be for the couple; even though he actually produces more revenue for the airline. According to Fader, “some customers deserve better treatment, and that should be decided on the basis of what they’re worth to the firm.” He further explains that when he’s defining “worth,” he’s not referring to what a customer has done in the past, but is basing it on a “projection of what we think this customer will be worth in the future.”

With the amount of data dealerships have at their disposal, it would certainly be possible to project customer lifetime value based on purchase trends and service revenue. Even Fader admits, however, that a healthy ecosystem will see some companies adopting customer-centric loyalty programs, while others continue to operate what he terms “performance superiority” programs, which reward people based on transactional frequency over revenue.

When considering net revenue during the initial transaction, a literal translation of this type of loyalty program to automotive dealerships might initially skew revenue (at least in sales) towards special finance customers. The customer with perfect credit, who negotiated you down to invoice less holdback, then brought his own financing, may not be the one who generated the highest gross of the day. But they may very well be the customer who brings the most revenue to the store over their lifetime. They are probably more likely to bring their car into your dealership for service than an independent auto repair facility, as price will be less of an issue.

On the flip side, sometimes, that special finance customer will be so thrilled with your assistance in getting them a vehicle, that they will bring you all of their friends and family to buy a vehicle. 

Delta’s new program is certainly an interesting concept and will be worth watching as its customers experience this program change. It will certainly experience some backlash from consumers who feel as if they are getting short-changed in the new system. However, no matter what happens, Delta will absolutely find out who its loyal customers are. Customers will make the choice to stay or defect to an airline that offers a more generous frequent flier program. 

Scott Nelson
Good stuff! Thanks for the article Mike.
Grant Gooley
Another great topic about being proactive in marketing instead of reactive. Loyalty programs are great, in fact I need to dig into a few vendors to see what's out there. Ill be keeping this article in mind. Using big data to understand the customer lifetime value is a great way to develop the program. Awesome, thanks for sharing!

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